Banking Law e-update 10/02/10

COURT OF APPEAL RULING ON THE MEANING OF "SUBSIDIARY"

The recent Court of Appeal decision in Enviroco v Farstad Supply A/A [2009] EWCA Civ 1399 has raised some interesting questions in relation to the interpretation of what constitutes a holding company and subsidiary for the purposes of the Companies Act 1985 (the "1985 Act") in relation to transactions involving a Scots law pledge of shares.

The decision does not affect companies who have a holding company/subsidiary relationship by virtue of s.736(1)(a) of the 1985 Act (holding a majority of the voting rights in the subsidiary), which would include the majority of group company relationships.

It should also be noted that the decision did not result in Enviroco becoming a subsidiary of the lender to whom its shares were pledged. However, in certain circumstances such an outcome is a possibility.

For those groups of companies whose holding company/subsidiary relationship arises by virtue of s.736(1)(b) or (c) the Enviroco decision may mean that finance and other contractual documentation may require to be revisited to ensure that definitions relying on the 1985 Act continue to operate as originally intended.

Also, there may also be implications for such companies as regards the operation of other Companies Acts provisions, VAT group rules, employee share and share option plans and the Landlord and Tenant Acts 1954.

The substance of the relevant sections of the 1985 Act is reproduced in the Companies Act 2006 (the "2006 Act") and so the effect of this decision will apply equally to the 2006 Act.

It should be noted that Enviroco have sought leave to appeal the decision of the Court of Appeal but no date has been set for the hearing as yet.

To read a more detailed note on this case, please click here.

MacRoberts advises on all aspects of corporate and banking law. For more information regarding documentation review, or provision of general advice as to the potential effects of this case, please contact Tony Cameron on 0141 332 9988.

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